Increasing Access to Credit in Communities of Color
Updating the Community Reinvestment Act to promote special purpose credit programs could improve credit and lending equity.
When Congress passed the Community Reinvestment Act (CRA) in 1977, it sought to close one of the remaining loopholes in civil rights-era laws: neighborhood-level discrimination.
Previous laws, such as the Fair Housing Act and Equal Credit Opportunity Act (ECOA), instituted significant protections against discrimination at the individual level, but the laws did not prohibit banks from denying access to credit and capital based on neighborhood-level demographics as the determinant. of risk. The CRA established an enforcement mechanism whereby banks are required to lend and invest in the same communities from which they receive deposits, including low- and moderate-income (LMI) communities, within the limits of safe and sound banking practices .
In addition to directing mortgages and small business loans to IMT individuals and communities, CRA has encouraged banks to invest hundreds of billions of dollars in community development capital each year. These investments have provided increased access to affordable housing, education and employment opportunities, community centers and other essential products and services benefiting ITM people and places.
Yet the CRA persists with a fundamental flaw: its colorblind assessment approach that uses income as an indicator of race.
In the 45 years since this anti-redlining law was enacted, racial disparities and segregated neighborhoods have endured. The legacy of slavery and persistent racial discrimination has created deeply entrenched structures of inequality that will continue to reproduce unjust outcomes unless intentionally countered. Discrimination protections are necessary to guard against explicit racial discrimination, but they are also insufficient on their own to address the structural racism embedded in society.
Given historical and current disparities in access to credit based on race and ethnicity, particularly in the black community, a conscious affirmative analysis of race is a critical component of reinvestment across the community. The CRA Act does not explicitly mention race, but it does require regulators to rate a financial institution’s track record in “responding to the credit needs of the entire community, including low- and middle-income neighborhoods.” So while regulators are explicitly required to review activities in LMI neighborhoods, they are not precluded from also incorporating a racially conscious perspective when assessing a bank’s CRI activity. throughout the community.
Research from the National Coalition for Community Reinvestment and Relman Colfax LLC provides in-depth analysis analysis Constitutional authorities allowing federal regulators to incorporate race-sensitive assessments into CRA regulations. There are many ways the CRA can and should be updated to address racial discrimination in access to credit. For example, ARC can incorporate analysis by race when designating assessment areas and assessing a bank’s responsiveness to local needs, just as it already requires analysis by income.
Special Purpose Credit Programs (SPCPs) are another practical tool that can advance race-conscious capital allocation within an anti-discriminatory framework.
CPCPs were authorized in ECOA, a 1974 civil rights law that prohibited discrimination “on the basis of race, color, religion, national origin, sex or marital status, age, receipt of public assistance benefits and exercise of rights under the Federal Consumer Credit Protection Act”. A arrangement in the ECOA allow creditors to set up SPCPs which will benefit “a category of persons who would otherwise be refused credit or would receive it on less favorable terms”.
Although CPCPs are an essential tool for advancing equitable access to credit for historically excluded groups, they have been underutilized since their authorization in the 1970s. Private financial institutions have not widely kissed SPCP. To encourage their creation, eight federal agencies recently published a statement to remind creditors of their ability to set up SPCPs and to remind them of the legality of such programs.
In the absence of banking action to create SPCPs, other mission lenders such as community development financial institutions (CDFI) have used SPCPs to create highly effective products and services for disadvantaged populations and are leading the field in demonstrating their ability to successfully develop, implement and manage such programs.
In 2021, the Low income investment funds (LIIF), a national non-profit CDFI, launched an SPCP, the Black Developer Capital Initiative (BDCI), in partnership with the National Affordable Housing Trust. BDCI offers a loan product from LIIF that provides Black-led affordable housing development businesses with seed capital at highly favorable and affordable interest rates so that developers can advance housing projects and support growth. of their business. Lack of access to affordable capital is a well-documented challenge facing Black borrowers, and LIIF’s BDCI capital product fills a critical gap in the market.
Products and services like BDCI are precisely the kind of business needed to begin to repair deep-rooted racial inequalities, and CDFIs are currently leading the financial services industry in demonstrating the value and impact of these programs. Nevertheless, additional incentives and enforcement may be needed to encourage more traditional financial institutions to adopt SPCPs, either by creating their own SPCPs or by partnering to support SPCPs run by CDFIs and other credit-based lenders. the mission.
As banking prudential regulators work Towards the first major rewrite of ARC regulations in 25 years, regulators can explicitly state that SPCPs are an essential tool that banks can use to meet their ARC obligations. This is a small but important step in codifying the link between CRA and SPCPs and integrating the use of SPCPs as a practical means of encouraging and enforcing the obligation of financial institutions to provide capital to communities of color.
CPCPs are not a panacea for all shortcomings of current CRA regulations, but they do reflect an underutilized opportunity to generate more affordable and accessible capital for communities of color. The mutually reinforcing opportunities between ARC and SPCPs should not be overlooked.